Analysts with investment bank Keefe, Bruyette & Woods (KBW) expect more of the same for the property and casualty insurance market next year, with a slow firming trend continuing.Insurers are finding it very difficult to achieve double-digit returns on equity because of a prolonged period of ultra-low interest rates, which have squeezed investment income, without sufficient increases in insurance rates to compensate for the investment shortfall.In its report entitled “2013 Outlook: More of the Same, Slow Firming Continues”, KBW states: “We expect the 2013 operating environment for P&C insurers to be pretty much the same as what we’ve seen in 2012 — modest rate increases but not much improvement in underlying underwriting profitability and persistent low interest rates that continue to weaken investment returns.“We suggest investors look to attractively valued companies that have proved they can generate solid returns under the current market conditions.”One of KBW’s “top picks” for investors is Allied World Assurance Company.In its analysis, KBW says low leverage is making the achievement of targeted returns difficult.“The P&C industry remains overcapitalised despite increased shareholder dividends (regular and special), share repurchases, and elevated catastrophe losses in recent years,” the report states.“Many companies are operating with anaemic premium leverage, making it very difficult for them to achieve adequate returns on equity.”The report adds that KBW expects investment results “to be under pressure for the foreseeable future” and, while underlying underwriting results may slowly improve going forward due to modest rate increases that are in excess of loss cost trends, KBW expects favourable prior year reserve development to wane.“We believe the long-sought-after hard market will remain elusive until much of the industry’s excess capital is eliminated and the industry faces balance sheet pressure,” the report states.“The income statement-driven market firming we see today should keep things moving in the right direction, but we believe the industry needs to see significant balance sheet erosion for P&C market conditions to truly harden.”The analysts believe that underwriting is key to success in this environment.“As the current market conditions may persist for years, we suggest investors look to attractively valued companies that have been, and can continue to be, successful in this environment and don’t need to wait for a hard market to arrive before producing solid returns,” KBW states.“Strong underwriters are able to generate good results regardless of where we are in the underwriting cycle. These companies are typically characterised by specialised underwriting expertise and/or they have some type of expense advantage over peers.”